CARBO Ceramics' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.25.12 | About: CARBO Ceramics (CRR)

CARBO Ceramics Inc. (NYSE:CRR)

Q3 2012 Earnings Call

October 25, 2012 11:30 am ET

Executives

Gary Kolstad – President and Chief Executive Officer

Ernesto Bautista, III – Vice President and Chief Financial Officer

Analysts

Jeff Tillery – Tudor, Pickering, Holt & Co.

Blake Hutchinson – Howard Weil, Inc.

Brian Uhlmer – Global Hunter Securities LLC

Trey Stolz – Iberia Capital Partners

Douglas Garber – Dahlman Rose & Company, LLC

John Daniel – Simmons & Co. International

Robert L. Christensen – Buckingham Research Group, Inc.

Benjamin C Swomley – Morgan Stanley & Co.

John Keller – Stephens Inc.

Operator

Hello, and welcome to today’s CARBO Ceramics, Inc. Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s remarks, we will conduct a question-and-answer session, and instructions will follow at that time. Please be advised this call is being recorded today, October 25, 2012, and your participation implies consent to our recording this call. If you do not agree to these terms, simply disconnect.

I would like to remind all participants that during the course of this conference call, the company will make statements that provide information other than historical information and will include projections concerning the company’s future prospects, revenues, expenses or profits. These statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from these projections. These statements reflect the company’s beliefs based on the current conditions, but are subject to certain risks and uncertainties that are detailed in the company’s press release and public filings.

Your host for today’s call is Mr. Gary Kolstad, President and Chief Executive Officer of CARBO Ceramics, Inc. Mr. Kolstad, please begin your call.

Gary A. Kolstad

Good morning, everyone. I want to thank for joining us to discuss CARBO’s Third Quarter results and our outlook for the remainder of 2012. Some of the highlights of the quarter, while the third quarter had its share of challenges, we are pleased that global sales volumes of CARBO’s Ceramic Proppant Volumes were only down 3% year-over-year as gains in international sales volumes partially offset declines in North America.

Despite the industry’s lower drilling and completion activity, we continue to see strong ceramic proppant sales volumes in the active major shale plays such as the Eagle Ford, Permian and Bakken. One reason for this strength is that several clients appear to be replacing lower quality, lower conductivity Chinese Intermediate Density Ceramic, IDC, proppant with our high quality, high conductivity lightweight ceramic proppant.

We have initiated a technical marketing campaign to help our clients better understand how CARBO’s ceramic proppant can positively impact well production and ultimate recovery when compared to IDC alternatives. We believe these efforts are effectively demonstrating the advantages of CARBO’s lightweight products to E&P companies.

Recently, CARBO engineers completed an internal study for a Bakken client, which indicated an approximate 20% increase in initial production in wells containing CARBOECONOPROP compared to similar wells containing Chinese IDC. This study is just one example of confirming evidence of the benefits received by using a higher quality, higher conductivity CARBO proppant.

International sales volumes continue their positive trend with China and Mexico leading our international growth year-over-year. Given the excess supply of Chinese ceramic proppant in the market today, the growth we are witnessing in China is a testament to the CARBO brand name, as well as our history of product performance and quality.

With respect to our distribution investments, we are pleased with the construction progress made at our site in South Texas. Once completed, this large distribution facility will allow us to better serve the Eagle Ford shale and other areas. CARBO also purchased property in North Dakota that we intend to use as a large distribution center, enhancing our ability to serve the Bakken shale play.

Falcon Technologies, our environmental risk reduction business continues to lead the premium containment market within the oil and gas industry. We are pleased to see Falcon set another quarterly sales record as the E&P community utilizes Falcon’s Engineered to Protect solutions to safeguard their assets in the environment.

Now, before I turn to the outlook, I would like to briefly review the financial and operational results for the third quarter, as well as technology developments. Looking at the financial and operational side, revenues for the third quarter of 2012 decreased 10% when compared to the third quarter of 2011. North America, which we defined as Canada and the U.S. proppant sales volume decreased to 11%, while international proppant sales volume increased 33% compared to the same period last year.

Operating profit for the third quarter of 2012 decreased 38% compared to the company’s all-time record high that in the third quarter of 2011. The decrease in operating profit was primarily the result of lower proppant sales volumes, a decrease in the average proppant selling price, higher fixed cost absorption, and an increase in freight and logistics costs, partially offset by a greater contribution from the Company’s other business units and a decrease in SG&A.

Net income for the third quarter of 2012 decreased 35% compared to the third quarter of 2011. Now, on a sequential basis, the average selling price declined in part due to field trials, and lower sales of third-party manufactured ceramic proppants. The field trials accounted for approximately 25% of the price decline. The lower sales of third-party manufactured ceramic proppant reduced our overall selling price, but conversely helped our gross margins.

We also saw favorable trends in distribution costs. Adding the mentioned factors above all up, our ceramic pricing decline was approximately 8%, but our consolidated gross margins, including DD&A declined only approximately 30%

Outlook, the global macroeconomic environment along with recent swings in commodity prices lead many uncertainties with regard to industry activity over the near-term. However, conversations with our clients remain encouraging about increased usage of CARBO ceramics proppants.

Although, challenges will likely continue in the fourth quarter, we expect the pressures on sales volumes and pricing to lessen over the coming quarters as inventories of Chinese IDC proppant in the U.S. continue to decline. In addition, we expect the fourth quarter to be adversely affected by normal seasonality issues, including weather and holidays.

With respect to our resin-coating products, we continue to do these products to more clients and more geographic areas. While this is a tough economic and operational environment for market development, we are confident that our high quality premium resin-coating products will gain a presence in the market and then we expect to achieve an improved utilization on resin-coating assets in 2013.

Moving on to project update, the distribution facility in South Texas scheduled for completion during the fourth quarter. Regarding our new property in North Dakota, we expect to begin construction of distribution facility during the fourth quarter with an anticipated completion date during the first half of 2013. These facilities will play a key role in providing the flexibility required to meet our client’s needs. The engineering work on the Millen, Georgia project is progressing, and we anticipate production could commence at the new plant near the end of 2013.

Moving on to Falcon, they extended their geographic footprint during the third quarter, and are experiencing solid growth. Although, Falcon may see an adverse impact from normal seasonality events during the fourth quarter, we believe Falcon is positioned to provide continued growth for many years to come.

Regarding the future, our primary mission is to make oil and gas wells produce better and recover more. In order to accomplish this mission, the focus on technology is at the heart of the company. CARBO has identified a new technique for the production of ceramic proppant. While still in the development phase, lab results indicate, this technique can produce a ceramic proppant with increased strength and comp activity when compared to traditional ceramic proppants. Work continues on this project and we will monitor results in connection with future growth plans.

We are encouraged by our overall R&D efforts and look forward to building on our 33-year history of leading the industry with new products. This completes our prepared remarks.

At this time, we will be happy to address any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeff Tillery of Tudor, Pickering, Holt and Co. Please go ahead.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Hi good morning.

Gary A. Kolstad

Good morning.

Jeff Tillery – Tudor, Pickering, Holt & Co.

As you guys think about the gross profit margins going forward and SG&A level you achieved in the third quarter anything unusual on those, or do you start to see stability in the gross margin levels as you step forward kind of thinking neutralizing for the impact of part of your Q4, seasonally softer periods.

Gary A. Kolstad

Yeah, I think, if you take up the seasonality part, we see more stability. As we mentioned just a component, we see a lessening of the pricing pressure. We’ll still see some pricing declines in Q4, no doubt. The other factor is that we have reduced volumes of the third-party manufactured ceramic proppant. Another factor is we are seeing some benefits on the distribution side and while we believe that the South Texas facility will prior be operating some where in the first part of November. So not very long from now, that will help. The one in North Dakota as we mentioned, probably done, know towards the end of the second half of 2013. We won’t see the benefit of that really until the second half of 2013. But all in all, I think a lot of the pressures we went through as we went on from Q1, to Q2, to Q3 have passed already.

Ernesto Bautista

That’s right. And I think from an SG&A standpoint, Jeff say for the full-year expectations would be somewhere in the 9.5% to 10% range of the present revenue. That is kind of what we are anticipating, that’s the full-year.

Jeff Tillery – Tudor, Pickering, Holt & Co.

With the mix change in the proportion of volumes more weighted internationally than they have been in quite a long time. Is that influence the way we should think about the gross margin?

Gary A. Kolstad

No I don’t think so, I don’t think so, I think you should put more emphasis on the fact that we’re selling, and we will sell more of our internally produced product that would be a bigger factor Jeff than the increase in international sales.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Okay. And my last question with New Iberia resin product facility, should we think about some resin-coated sand has been solved in the fourth quarter or does that not really happen until next year.

Gary A. Kolstad

We will sell more in the fourth quarter than we did in the third quarter that’s for sure, but it still won’t be that big of an effect.

Jeff Tillery – Tudor, Pickering, Holt & Co.

And then last question, Ernesto can you give us some help with what happened to inventories in the quarter for you guys just up down?

Ernesto Bautista

Sure, no problem finished goods did show a slight build as our ceramic proppant inventory actually was down we had a build in resin-coated sand. In addition we had a decrease in raw materials the net effect of all of that it will be a slight build in overall inventory.

Jeff Tillery – Tudor, Pickering, Holt & Co.

All right thank you guys.

Operator

The next question comes from Blake Hutchinson of Howard Weil. Please go ahead,

Blake Hutchinson – Howard Weil, Inc.

Good morning guys.

Ernesto Bautista

Yes. Good morning.

Gary A. Kolstad

Good morning.

Blake Hutchinson – Howard Weil, Inc.

I think if we go back to the last conference call you had mentioned or given some parameters to the type of price degradation that you’ve seen, is it early as June, now it would look from quarter-to-quarter as if in most of the quarter-to-quarter price move was probably already in place in June and July and maybe you could just have a bit of belief from there, would that be a right way to look at this

Gary A. Kolstad

Well, I think we mentioned in Q2 it deteriorate a lot from get in the quarter to the end of the quarter for sure. So you are fairly correct in your comments. The other thing you should keep in mind is that I said 25% of the decline in the third quarter was due to field trials. And then the other part of that even though we had a higher price on the third-party manufactured. We sold less which put the price down, but of course conversely our gross margins actually benefited from that.

Blake Hutchinson – Howard Weil, Inc.

Right and then in terms of field trials, as a percentage overall and we would probably be looking at something fairly similar at least through year-end.

Ernesto Bautista

I should hope so, we like the way those are going and hopefully in Q1 as well so now we’re very pleased with the amount of field trials we’re doing.

Blake Hutchinson – Howard Weil, Inc.

Okay and then just trying to address the benefits of having facilities in place, your own facilities in place in South Texas and the Bakken. Up to this point has most of the added distribution cost over the last year, by year recorded then from kind of plan to basin or has the kind of inter basin management of inventory have been more of the cost burden thus far.

Gary A. Kolstad

Most of the cost burden comes from plants to distribution centers and then we also experienced cost well as setting a distribution centers so most of our cost come from the railroads in other words and the demand charges, the fact that we have to stop at different parking lots along the way just the way things are clubbed up in North Dakota, so it’s mostly been a railroad issue, so we’re building things so that we can take that out of the equation.

Blake Hutchinson – Howard Weil, Inc.

But it would be correct then to say that installation of the distribution centers in and themselves are not a key role and you still have to manage the system up onto that point, to kind of push margins appear.

Gary A. Kolstad

Well, I kind of characterize it, I think over the last quarter that, in 2011 the cost of distribution number one, there are two in 2012. And we hope, as we go into 2013 and especially in the second half of 2013 that we are going to get it down to 1.5. We will have additional cost just quite honestly due to the fact, we are traveling larger distances with more volume, i.e., North Dakota, and the railroad factor can’t be underestimated. So we do good, ones from distribution center to wellhead, that’s not an issue at all. We are very good at that. But some of – Jeff, you have to understand, you actually have to have product there to take advantage of the market.

Blake Hutchinson – Howard Weil, Inc.

Yeah, absolutely. And then just one last one and I’ll hang up and listen. The enhancements you alluded to on your product, I think that these can be achieved within the constraints of the current manufacturing footprint?

Gary A. Kolstad

Well, we have to scale up to plant production. So we have produced it in the lab, we’ve seen the results. Our focus now is making sure we can scale up the technology to a plant type production level.

Blake Hutchinson – Howard Weil, Inc.

Which you wouldn’t have to reconfigure your current plant structure to get what you want?

Gary A. Kolstad

I don’t think we are going to comment too much on that since we have everything including competitors on the conference call here today.

Blake Hutchinson – Howard Weil, Inc.

Okay. Got you, thanks a lot.

Operator

The next question comes from Brian Uhlmer of GHS. Please go ahead.

Brian Uhlmer – Global Hunter Securities LLC

Hey, good morning, everybody. How are you?

Gary A. Kolstad

Good.

Brian Uhlmer – Global Hunter Securities LLC

You answered half of my question right there, I believe as Blake was asking about your new technology, your new manufacturing process. I am little curious you kind of horn in a little bit more on you say, your exact words were higher strength than traditional proppant. Is that than traditional CARBO’s ceramic proppant or your competitors’ lower strength proppant? And so what degree is it strong or we’re talking a magnitude or 2X strength or what the magnitude of that have results? And then moving along, what would kind of be the CapEx requirement at the timing of something like that, so we’re looking at 2013 events or 2014 or beyond?

Gary A. Kolstad

Yeah, I want to answer the later part of those questions. But the first part is that its conductivity is what is important, right. That’s the only thing that matters and fracturing its conductivity. So today our products are higher conductivity than our competitors and I think the industry knows that.

What we want to do is create a product that puts another level of conductivity. And we’ve already shown that in the labs. We’re not going to quantify that are exposed that to the outside world yet. But if we’re successful and scaling and it’s up to flat production it will raise the volume in the industry, up another level, just like we did with our past product introduction.

Brian Uhlmer – Global Hunter Securities LLC

And would you assume that the operating costs to manufacture would be similar to your exciting product lines?

Gary A. Kolstad

That is absolutely our goal, correct.

Brian Uhlmer – Global Hunter Securities LLC

Okay. And my follow-up, moving on to the field trials, is your assumption, your discuss in pricing lower to field trials as the assumption that what the proving out of field trials that you can prove improvements in well results and if we can get better pricing moving forward. Is that your objective or that the pricing will actually go up after field trials have done or you have better long-term customers or you still in price then lower than your traditional pricing?

Gary A. Kolstad

We put bookmarks around field trials, by that I mean we do X amount of wells. The clients provide us production information, but we book and so whether that’s five wells, 10 wells whatever and that offered an economic or commercial advantage one that’s over then pricing goes back to whatever our pricing maybe. And our hope, which is the same strategy we’ve had for a decade or two, is to grow the volumes of ceramic proppant sold.

Ernesto Bautista

Right, but okay, go ahead.

Gary A. Kolstad

I think that was the moderator and not me. Was there another part for that question, Mark?

Brian Uhlmer – Global Hunter Securities LLC

No, that’s fine. We’ll turn it back. I will talk offline.

Operator

The next question comes from Trey Stolz of Iberia Capital Partners. Please go ahead.

Trey Stolz – Iberia Capital Partners

Hi, guys, thanks for taking the question. I guess, what’s the CapEx for the quarter?

Ernesto Bautista

CapEx for the quarter is about $11 million.

Trey Stolz – Iberia Capital Partners

Okay. And going back to what Jeff was asking, on the SG&A a pretty significant decline from $17 million to $15.1 million. And when I visit you guys last month, I guess I was on the impression that higher cost particularly from distribution side, which you touched on. I was just curious a little bit more, what’s going on in that SG&A decline, because I have to look back over to 2Q 2010 to see an SG&A line that low?

Gary A. Kolstad

Two things, I would say. One, compensation is a big factor there, incentive comp specifically. The other is just an overall and this is on cost reduction given the environment, which we are operating, which is something that’s familiar to us, you point back to 2009, where we had a similar environment, we tightened the bulk. So it’s something that we’re seeing across all departments, it’s not specific to anyone. The one thing that is consistent amongst them all is the incentive component.

Trey Stolz – Iberia Capital Partners

Okay, all right. Can you give me examples of like; I guess cost reduction other than what you talked about was about distribution and the new plant?

Gary A. Kolstad

Yeah, sure. I mean, as an example you can cut your T&E. That’s the simple one right. You spend on what you mean now what you want, to generically saying it, but our folks clearly understand that if there is training sessions that are nice to have, but not a necessity from a certification standpoint then we don’t tend them. It’s that type of thing that once you aggregate it all, you can come up with some pretty margin out and savings. Again, I don’t want to overemphasize that over the fact that internal component is the larger component.

Trey Stolz – Iberia Capital Partners

Okay. And my guesstimate on Falcon actually incorporated your pricing guidance on ceramic. Is it something around $15 million in revenue for the quarter or a little more than that, is that accurate?

Gary A. Kolstad

Well, what we’ve always said is that, we have updates at the second quarter. And at the beginning of the year, we always tell you what Falcon business had rental revenue in the previous year in the January call, and we give you guidance on the percentage of growth. So first part of the year, we said 15% to 20% growth this year, and I think in the second quarter we reaffirmed that and we certainly would reaffirm that here now again. So it’s something around the 15% to 20% growth versus last year.

Trey Stolz – Iberia Capital Partners

Okay. And looking internationally you mentioned 33% year-over-year growth and mentioned China in the press release in particular. Can you give a little more information on what’s going on there in terms of the sales numbers, or production numbers, volumes, and what percent that represented for 3Q?

Gary A. Kolstad

Yeah, we don’t break it out that much detail. I mean the factors of the same things that you’ve heard from one of the big service company’s recently. There is more horizontal drilling. We get the benefit of – there is Western E&P that are drilling there too. So they know conductivity in importance of it, but we’re also selling into the regional groups of PetroChina. So we have a plant in China, but we say that we’re achieving more domestic sales. It will be record domestic sale year, plus this year just like later year was as well. And we find that very interesting giving the lot of these lower quality, lower conductivity Chinese ceramic proppant have been produced there.

Trey Stolz – Iberia Capital Partners

And you wouldn’t say that factored into the price decline quarter-over-quarter?

Gary A. Kolstad

No, no that’s not that big; no.

Trey Stolz – Iberia Capital Partners

Okay. And I guess one more is to the extent, you can give any kind of detail on your penetration into the market as far as the percent of total volume in Bakken, Eagle Ford, Permian versus Haynesville, where you’ve been traditionally and any kind of color you can give us there and how that might change further of the coming quarters?

Gary A. Kolstad

I think this would be more of the same. We’ve already said, we effectively moved everything, it was amazing what the team did, moving when the Haynesville collapsed, how fast we moved our products to the other place in particularly the Eagle Ford and the Bakken. But we’re very pleased with those two and we’re also pleased with Permian. But having said that, we have other places like Oklahoma, international were there growing well too, but there are the two big ones are the Eagle Ford and the Bakken.

Trey Stolz – Iberia Capital Partners

You wouldn’t care to break that out on a percentage basis, the Eagle Ford, Bakken and Permian?

Gary A. Kolstad

No. We sure don’t.

Trey Stolz – Iberia Capital Partners

Okay, all right. That will do it for me. Thank you.

Operator

The next question comes from Doug Garber of Dahlman Rose. Please go ahead.

Douglas Garber – Dahlman Rose & Company, LLC

Good morning, guys.

Gary A. Kolstad

Good morning.

Ernesto Bautista

Good morning.

Douglas Garber – Dahlman Rose & Company, LLC

Gary, I wanted to ask you, what changes the pricing dynamic? What do you think what have to happen for you guys to start being able to go to your customers and increase pricing. It seems like things are stabilizing here with less inventory after the Haynesville collapse early last year? But what happened for that service?

Gary A. Kolstad

Well, first of all I think the fourth quarter; we’re all I think in the same period. We listen to all of the previous earnings reports from the service companies, the E&P and I think everybody is kind of wait and see on the fourth quarter. There are some conversations about service companies about E&P will have less budgets, finishing off their budgets for 2012, and startup in 2013.

So I don’t think it’s worth of conversation in Q4, quite honestly and I kind of indicated, we might see modest pricing declines in Q4. I think for us, we tend to think more about 2013, and a lot of that’s driven by, when does our marketing sales team sell out our plans. And so that’s kind of what drives us. Remember, a couple of decades now, we’ve been driving volume and once we get there then we’ll look on the other side of it.

Douglas Garber – Dahlman Rose & Company, LLC

So should we think about maybe when you get to 95% utilization or so that’s a benchmark for when you start rising pricing a little bit?

Ernesto Bautista

I think we should probably think about when the industries appears to get healthier.

Douglas Garber – Dahlman Rose & Company, LLC

Okay. And wanted to ask you a question about the Chinese bauxite supply, have there been any issues that you’ve noticed in China and now that Indonesia has start or slowed down significantly their exports to China, any scarcity of bauxite in China?

Gary A. Kolstad

Not that we are aware of. I think they’ve shutdown a lot of that capacity in China there (inaudible) down. so, their demand side would obviously be a heck of a lot lower too.

Douglas Garber – Dahlman Rose & Company, LLC

And just one more small question here, the inventory that you guys had at the end of last year from the third-party ceramic, have you guys completely cleared that out of your balance sheet and/or do you have some of that still to sell.

Unidentified Company Participant

No, we got a little bit; it’s no longer an issue for us and not of a material nature.

Douglas Garber – Dahlman Rose & Company, LLC

All right. Thanks guys, I’ll turn it back.

Operator

The next question comes from John Daniel of Simmons & Co. Please go ahead.

John Daniel – Simmons & Co. International

Hi guys, Ernesto it’s for you. I believe at one point earlier this year you had commented that margins would not go towards the ‘09 trough levels, just want to confirm that you still make in that view?

Ernesto Bautista

Sure. Well, actually we said that after the first quarter call, we intentionally left commentary about 2009 off of the second quarter call because we didn’t have the same visibility that we had previously and at certain point during the third quarter, actually commented that (inaudible) those levels we just had to wait and see how things have gotten from a competition stand-point, field trial stand-point and how our cost reduction initiatives would walk through. A lot of that also depended on how quickly we could put the infrastructure in place from a distribution stand-point. There were a lot of variables that were at play and so difficult for us to comment different – in the same fashion as we had during the first quarter call.

John Daniel – Simmons & Co. International

Okay. So, I mean, you guys did a good job controlling cost and I am sorry to hear, the incentives were removed, but I mean really good margin performance I think relative to some people’s expectations, certainly in line. And I am just wondering, given that relationship now you feel like – you still don’t want to. You are keeping it on the table little bit, so you can still get nice drop margins, that’s what I’m understand.

Ernesto Bautista

I think we will take a conservative posture on that at this point just because we still have some competition. We look through there is still volatility from a distribution standpoint, just because we saw some favorable trend in the quarter, it doesn’t necessarily mean that, they’re going to be there during the fourth quarter. We’ll get more comfortable as the quarter progresses.

John Daniel – Simmons & Co. International

Fair enough. I mean, I guess, I’m really not going to get specific guidance on this, but just given the seasonality of Q4 and some pricing pressures out there moderating, it is safe to say that margins in Q4 are going to trend a bit lower from here?

Ernesto Bautista

I think that’s fair.

John Daniel – Simmons & Co. International

Okay. Gary, here’s one for you. Just given that pricing pressures are moderating, can you feel that we need to stay at a structurally lower price just to make sure that the Chinese folks, keep there a profit there as suppose to bringing the price back up and making it more attractive to the end product?

Gary A. Kolstad

I think you should first inform most of the majority your thinking should be about the quality and the low conductivity of the Chinese. And a couple conferences ago, or a couple of months ago I guess was now, I started to show that to the industry. So you can pull up our investor slides and see how poor a quality it is. And the internal void space and all these others thing that surface, so I think the industry is really benefiting for understanding the risk. They’re putting on production and recovery with this low quality stuff. So that’s what we’re focused on, educating the industry and pricing is what the pricing is. We know how to maneuver with that, and that’s nothing new to us.

The other think I’d say, and may be a kind of well there is couple of questions that’s been taken place here. I think the industry is waiting to see what happens with gas prices, because you know for all of these E&P companies, say they are oil companies now, there is lot of – still have a large component of natural gas bringing cash in. So as the change happens with natural gas, I think that maybe one other things that even without a lot of increase drilling activity is just a cash flow that comes up from gas moving a little bit will be meaningful for some of these guys. I think that will be one of the factors that influences all of our thinking.

John Daniel – Simmons & Co. International

Okay. I got one more if I may. Just on the competitive framework, there’s been some chat over the past year about the new ceramic players and I know some of the qualities probably not as good as yours. But and often you’re not going to gain specifics, but broadly speaking, are you hearing any commentary about the emerging players having delays getting plants online or feedback from customers that are using the newer players product, not necessarily the Chinese in terms of just quality issues?

Gary A. Kolstad

We’re not really up to do that? We’re pointing out that real poor quality of the Chinese. But I would say that the other fellows that maybe – our experience in the fact that it isn’t easy to make high-quality ceramics, let me put it that way and leave it that way.

John Daniel – Simmons & Co. International

Fair enough, that’s right. Thanks guys.

Operator

Our next question comes from Robert Christensen of Buckingham Research Group. Please go ahead.

Robert L. Christensen – Buckingham Research Group, Inc.

Good morning and thank you for taking my question. Can you broadly speak to where North American ceramic sales go for you now and so dividing oil, liquids-rich plays and dry gas where they are now on those categories as a percent and where they were let’s say in the third quarter of last year?

Gary A. Kolstad

Yeah, Bob, it is just dominates our business today. The vast majority is in oil liquids play, I think the Group brought those together. We still sell a certain amount into the great gas, and there are still some gas plays and we are very economic already like Southwest Wyoming and stuff like that, so there is still some of those play.

But for me, I’m excited about where we stand today basically beyond in an oil world than, at some point a lot these places that the industry is abandoned will come back and drill for another 10 years when they get a chance right, when the prices get right, especially the East Texas, North Louisiana play. So it’s by far the vast majority, we don’t tell percentages, but it’s just dominated by those plays.

Robert L. Christensen – Buckingham Research Group, Inc

Would you say it’s basically inverted in 12 months?

Gary A. Kolstad

No, I think Bob, because we started moving, I think we are kind of mentioned that two years ago, we started to move some of our product and get out there, because we knew it’s going to happen. So I won’t say, not inverted in a year, he said two years, I would agree with you.

Robert L. Christensen – Buckingham Research Group, Inc

Okay. And then my final question. Looking at Schlumberger’s highway, I guess pumping of product, proppant I should say. They have a pretty good slideshow as to its effectiveness, and they have been talking about how much more years it’s been getting from producers and one of the aspects I think at highway is less proppant per well. How should we think about that when it comes to CARBO Ceramics, I am not going to see 40% less ceramic, it’s we’re proppant in general, it’s highway who has pumped in every single well in the country, how do we think about that Gary? You’re an

Gary A. Kolstad

Thanks. So first of all they are a great company. They’re a good client of CARBO right, let’s set the stage right there.

Robert L. Christensen – Buckingham Research Group, Inc

Why?

Gary A. Kolstad

But, I don’t think that’s going to impact us too much, the good news is that they thing conductivity is some important and so do we, I am not going to go through the questions and answers about highway, I think those are getting to be better now, and I think when you put in the perspective of volumes, we do whatever 75,000 or 80,00 frac stages in the U.S. in a quarter, so the numbers that have been put out there but the usage of highway just get the calculator out and…

Robert L. Christensen – Buckingham Research Group, Inc

Yeah okay,

Gary A. Kolstad

Just, I think the actually the exiting part is that, when you look at conductivity in ways to handset just imagine how good highway would be if we have ceramic in it and I think that’s may be the next positive step to (inaudible)..

Robert L. Christensen – Buckingham Research Group, Inc

I like that comment, just one more if I may on the international growth last quarter, you had a 20% increase in international sales year-on-year the average 35% year-on-year, can this kind of growth rate continue for a while and why are we seeing it internationally so much these days

Gary A. Kolstad

I think some of it, is that there is a couple of big place like I said, for us it was China and Mexico and I think the service companies have talked about that as well, and some of the E&P so that’s just pretty natural, we’ll always see a growth in international right, but unfortunately it still is the small part of the business and you still have, the U.S. was 75% of the fracturing and Canada whatever 10% of the fracturing so, you can never catch the North America machine and we are in a depression in natural gas in the U.S. and concern in about the oil activity, but you just can’t catch us, when we pick back up again it’s going to be very good for all of us.

Robert L. Christensen – Buckingham Research Group, Inc.

But it’s a nice outlet have and it’s 18% of your sales and it’s growing fantastically. Can we see that continuing for next 12 to 24 months that kind of growth rate?

Gary A. Kolstad

I don’t know.

Robert L. Christensen – Buckingham Research Group, Inc.

Okay.

Gary A. Kolstad

We would probably grow Bob, but I don’t want to put any figures out there. I’m just saying that you can’t keep up with North America that’s where we remain focused all around the world, but we also understand that North America can do.

Robert L. Christensen – Buckingham Research Group, Inc.

And I guess prior to that maybe it’s a NASDAQ question, but the tax rate was lower for the company, is that a function of greater international sales in NASDAQ?

Gary A. Kolstad

No during the third quarter, every year, we do a return of cool processes, where we adjust our current year provision based on what actual taxes we filed that’s really the genesis behind the world rate. We took with the 34% to 35% rate on average from a modeling standpoint.

Robert L. Christensen – Buckingham Research Group, Inc.

From year and out and then another readjustment in the third quarter next year…

Gary A. Kolstad

That’s right. That’s right.

Robert L. Christensen – Buckingham Research Group, Inc.

Thanks for that. Thanks for that, okay. Thanks guys.

Operator

(Operator Instructions) Our next question comes from Ben Swomley of Morgan Stanley. Please go ahead.

Benjamin C Swomley – Morgan Stanley & Co.

Hey, congrats on the quarter.

Gary A. Kolstad

Thank you.

Ernesto Bautista

Thank you.

Benjamin C Swomley – Morgan Stanley & Co.

I just wonder just hoping you can give us a little bit of color around, you mentioned that you’re taking share from Chinese IDC proppant and I was wondering why now? Presumably Chinese proppant pricing is fallen as much more than CARBO’s, those are that you’ve been able to do studies, technical studies that you’re now on with and you can go and you show that way, is that the Chinese there is a lower inventory of it and so customers need to shift to your product or could you give us some color on why you are able to take share this quarter?

Gary A. Kolstad

Well, first of all, good question. But first of all it’s just a repeat back in late 2008 or late 2009 view that my opinion what would happen is the industry went down is that, people would slow their purchases of the lower quality Chinese proppant and would use more of our since it was available. I said that again as we entered into this downturn and I think so that’s one factor.

The second things is that we have been on a campaign to really expose technically how far to do, and how they can impact production and recovering wells. The third is the business model, so those that consumer ceramic proppant really like CARBO’s business model, where we are the ones that have the inventory, they can trust the quality and we deliver what we say we’ll, and they don’t have to buy inventory in a forging country and hold us and ship us from doing all these other things.

And others there has been recent commentary by some people about, just the cost of doing that business as well. So we don’t get too worried about that our business model will stand all of this. But the most important thing is for the industry to understand how bad the conductivity and quality of it is.

And in particular some of the consumers of that when they purchase it, they buy it from distributors, and they don’t have a clue who manufactured the proppant. And so as we’ve done the quality test on it then done the internal philosophy test and stuff, we are finding such a variability that is just incredible. So I think that’s the main reason for the extension.

Ernesto Bautista

Not make sense. And also then on the field trials, could you just give us some sort of a ballpark roadmap for what you expect like, what would be a reasonable expectation to see a major new customer went out of those field trials? I mean is it a three to six months thing, is it a 12 months thing, I mean not trying to write-down something very specific, but just trying to form some expectation around that?

Gary A. Kolstad

Well, our industry time goes in 30 day, three months, six months, but I think we always give the guidance of that. We need to wait six months before we can really give a good answer on maps just because you need to do that and now they should know the 30 days don’t need as much, because sometimes people chocking back their wells on the production. And so I should probably use six months, so if we started one today six months from now, we’d probable have a pretty good indication of what’s taken place.

Benjamin C Swomley – Morgan Stanley & Co.

Right, but I think some of these restarted early in the quarter even in the second quarter, is that right?

Gary A. Kolstad

Yeah.

Benjamin C Swomley – Morgan Stanley & Co.

Okay. So then maybe at some point in the next one or two quarter we might expect to see something amount of it.

Gary A. Kolstad

That correct.

Benjamin C Swomley – Morgan Stanley & Co.

That’s all from me. Thanks

Operator

The next question comes from John Keller of Stephens. Please go ahead.

John Keller – Stephens Inc.

Hey, guys. Just most of my have been answered is quick question on the sort of pricing behavior of some your competitors, I mean I think previously you notice some pretty rational behavior. Have you seen any of that really abate or some of that still going on the marketplace maybe can you share a thoughts around that?

Gary A. Kolstad

I think that when we put in the press release that we thought pressures would leave on the release over the coming quarter that kind of reflects the way we think on that. And once again it’s very important, some of those necessarily pricing was done by people such as distributors where you have no idea, what the product as you’re buying. So some of that will go away in the E&P and services companies will make it clearly

John Keller – Stephens Inc.

Got it. And then I guess just in terms of say, the puts and takes on the margin maintenance spud, just trying to kind of get directionally the things we should be thinking about that really either positively and negatively impact the margins, I mean, how should we got pricing, which has been wasn’t negative in the third quarter some incrementally higher third-party sales help margins, transportation sort of a drag. Anything else in there that we should be particularly paying attention to or thinking about as we kind of think about the margin profile going forward?

Gary A. Kolstad

Those are probably the most significant items that just covered.

John Keller – Stephens Inc.

Perfect. That’s it from me, thanks.

Operator

At this time there appear to be no more questions. Mr. Kolstad, I’ll turn the call back to you for closing remarks.

Gary A. Kolstad

Thanks everyone for joining us again this morning and I want to summarize few key points for you. As we mentioned throughout the call, there would be some continued challenges in the near-term and they will put pressure on some sales volume and pricing like we’ve seen in the last few quarters. However, we believe these pressures will ease over the coming quarter as the inventories in the U.S. and Chinese IDC proppant appear to be declining.

We will continue to highlight market benefits achieved by utilizing a light weight ceramic proppants in reservoirs. We continue to focus on improving the efficiency of our distribution network and we except our capital investments [Audio Gap] this effort in 2013.

We are pleased with the growth in Falcon Technologies, StrataGen and the Fracpro businesses, we are maintaining a very strong balance sheets. And then last but not least we believe the future is very, very good for CARBO. As I mentioned earlier, technology is at the heart of the company and we are very excited about this latest development regarding our new proppant production technique, and we look forward to advancing the conductivity in the frac and ultimately increasing the production on EORs for E&Ps.

With that, I would like to thank you for joining our call today, and we look forward to seeing you next time.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!